Simplifares Naysayers Are Just Plain Wrong

WorldTraveler

Corn Field
Dec 5, 2003
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Fares Fly After Reform: Carriers Testing $499 Cap As Published Prices, Corp. Costs Rise

By David Jonas

JUNE 20, 2005 -- Many corporate purchasers today are paying more for tickets than they did at the beginning of 2005 when Delta Air Lines led the industry in reforming published pricing. For others, savings are apparent but not necessarily to the extent indicated by preferred carriers during contract renegotiations earlier this year. Even when excluding corporate discounts, changes to published business fare levels are difficult to assess—varying by fare type, market and carrier in question—but recent data suggest fares purchased by many corporate travelers have risen steadily since January.

Nonrefundable airfares, for example, on average rose 13 percent from $204 one way in January to $230 in April, according to New York-based Harrell Associates, which measures fares across 280 top domestic routes. Nonrefundable airfares are favored by many companies and include alternate business fares that have certain restrictions, such as an advanced purchase and a minimum stay, but are more flexible than typical leisure fares. Continental's April average was highest at $256, while American's and Delta's increased most, both in excess of 30 percent. Conversely, unrestricted refundable business fares are down markedly from last year and somewhat from the beginning of this year—31 percent and 4 percent, respectively.

"Fortunately, the lowering of unrestricted fares had less of a dilutive effect than many expected," said American Airlines CEO Gerard Arpey in an investor's conference this month.

That's because carriers this spring repeatedly raised most other fares. Through the middle of last week, airlines this year attempted 11 broad fare hikes in the domestic market, eight of which have endured, said a Northwest Airlines spokesman, who noted that three of six Northwest-led attempts had remained in place. That excludes targeted fare hikes attempted by various carriers in specific markets only.

Overall, network carriers raised hundreds of thousands of individual fares since February, lowered tens of thousands and filed between 60,000 and 185,000 new fares in each of the past four months, according to a new analysis conducted by Travel Analytics and commissioned by the National Business Travel Association. In that time period, the cumulative impact of all fare changes at five of the six largest network carriers was at least a $15 hike one-way. United Airlines was the contrarian, with only a marginal net increase.
For corporate buyers, published price increases are not necessarily the issue—most recognize them as necessary to help keep financially strapped airlines in the skies, especially when considering just how low fares had been. The concern, they said, is that average fare paid, when factoring in diminished corporate discounts and other factors, may be higher than expected.

"A healthy airline environment is good for all of us and lots of accounts feel the carriers' pain, but corporate travel managers feel like they are paying the burden," said Tim Fleming, executive vice president for sales, operations and client services at Omaha, Neb.-based Travel & Transport. "There is a general unhappiness with what has been done with fares."

One recent attempt to raise fares—the most substantial in 2005—fizzled early last week when some competitors did not match a Northwest Airlines move to add $50 to virtually all one-way business fares. That attempt tested the $499 cap Delta put on one-way fares as part of airfare simplification in January (BTNonline, Jan. 5).

Newly named Northwest vice president of passenger marketing and sales Jim Cron, in an employee memo, said "Delta's $499 cap is artificial and has actually depressed fares, which otherwise would have been included in recent fare increase initiatives."

Both Continental and United airlines matched Northwest's $50 increase, but American and Delta did not. J.P. Morgan Securities analyst Jamie Baker said Delta's $499 cap "will eventually need to rise for future industry fare increases to occur."

"You will see SimpliFares stick for now, but over the next year or two you will see movement," said Darryl Jenkins, visiting professor at Embry Riddle Aeronautical University, this spring. "None of us now has a long-term pricing strategy that will cope with low-cost competition or high jet fuel prices, so it will have to change."

Just before press time last week, Continental Airlines had raised many fares, pushing its cap on certain prices beyond $509, according to analyst reports. Northwest followed by similarly raising many business fares to $509 each way, according to a spokesman.

Meanwhile, on a smaller scale, JetBlue Airways last week confirmed it had raised by $5 one-way fares on transcontinental and other long-haul routes. The carrier's highest walk-up fares were excluded to maintain its $299 cap. American matched JetBlue's price hike, according to a spokesman.



Corporate Costs

Like published pricing, average corporate air travel costs changed noticeably this year. The most recent American Express Business Travel Monitor shows the average one-way fare paid by the company's corporate travel clients in this year's first quarter fell to $202, a five-year low, "though our data suggest that with the rebound in business travel, rate rises may return in the near term," said Andy McGraw, senior vice president and general manager for American Express Business Travel North America. Amex said the average fare paid in April edged upward to $210.

Amex reported average fare paid across 160 international routes in the first quarter increased 4 percent versus last year. The average one-way business class fare ($3,803) and first class fare ($5,684) each jumped 7 percent. "We have seen a considerable increase in international travel costs, particularly across Asia, where robust economic growth continues to drive strong traffic demand," McGraw said.

Delta Air Lines last week raised by $10 the passenger surcharge each way on many transatlantic fares, citing rising fuel costs.

Meanwhile, airfare auditing firm Topaz International said the average cost per domestic passenger name record among the corporate travel programs it studies reached $550 in May, up from $406 in December. While Topaz numbers showed year-over-year reductions in January and February as the full impact of Delta-led airfare reform took hold, in each of the three months since, average costs per PNR were higher this year than in 2004.

"Since the announcements earlier this year of simplified airfares, Topaz has been watching carefully and cautioning clients that have asked about doing anything quickly with regard to making any changes to air contracts," Topaz president Brad Seitz explained. "Now we see that business airfares are in fact going up, and will continue to rise until there are competitive pressures to drive them back down. Corporations must keep a close eye on the actual rates they are paying and do their best to be equally competitive with their discounts."

Indeed, some companies that had anticipated lower overall rates as carriers adjusted corporate contracts to lower published fares are not seeing as deep of savings, if at all. "Our air spend this year is lower, but not nearly as low as the airlines said it would be," said one Chicago-area travel manager.

"It makes it increasingly difficult to promote savings, especially domestic, provided by our managed travel program," added a travel manager from a Boston-area firm."I have begun to more actively promote the service and convenience of the program as our savings levels have decreased."

Fluctuating published airline pricing long has been a way of life for corporate travel professionals seeking to keep a lid on travel expenditures. The more controversial developments occur when carriers test the waters of ticketing rule changes. US Airways, for example, drew fire from corporate buyers when it led the industry in restricting reuse of nonrefundable fares (BTN, Sept. 9, 2002). Northwest, which had matched US Airways' policy, this spring adjusted its nonrefundable fare rules by requiring those travelers booked on such tickets and who wish to change their travel plans to make an exchange within 90 days after the originally ticketed flight. Travelers previously had a full year to make an exchange, provided they cancelled their plans before the original date of travel.

This month, the carrier again altered ticketing rules. Coinciding with its attempted $50 fare hike this month, Northwest changed its minimum-stay requirements from one night to two nights on many tickets. Cron told Northwest employees that the change would provide the carrier "valuable price segmentation, which the fare structure now lacks." That attempt also failed.




Links referenced within this article

(BTNonline, Jan. 5).
http://www.btnmag.com/businesstravelnews/s...t_id=1000747085
(BTN, Sept. 9, 2002).
http://www.btnmag.com/businesstravelnews/s...tent_id=1666630


Find this article at:
http://www.btnmag.com/businesstravelnews/h...t_id=1000963787

...and the Air Transport Association is saying that domestic flown yields are actually positive in the most recent reports and are improving faster than international yields.
 

Beer Guzzler

Advanced
May 20, 2005
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Atlanta, GA
aogdesk.org
Analysts predict there is a 55% chance that Delta will file Chapter 11 by years end. 2 of the biggest negatives are Pension Cash Drains & Lost revenue from 'Simplifares' (with the 'simplifares' Delta is has no ability to even begin to offset fuel costs).. 'Simplifares' are hindering Delta's ability to increase fares even by $10-20 roundtrip..

Delta
- Cash reserves last quarter of only $1.8 billion
- Pension cash drains
- Losing revenue from its “SimpliFaresâ€￾
+ Delta’s unit labor costs are now among the lowest in the ‘Legacy’ Airline Group
- Higher fuel costs and SimpliFares have offset many improvements and despite turnaround efforts aimed at saving $5 billion annually by 2006
- Delta still could be in Chapter 11 by year-end

Aviation News (Blog) / (AJC)
 
OP
WorldTraveler

WorldTraveler

Corn Field
Dec 5, 2003
21,710
10,721
Since no one outside of any airline has specific information on fare product usage, it is pure conjecture to say whether Simplifares is revenue positive or negative. At almost the same time that Delta implemented Simplifares, it closed its DFW hub, and totally rebuilt its Atlanta hub. There is simply no way of knowing with certainty if any changes in Delta's RASM are attributable to SF without knowing fare product usage.

Further, lumping fuel cost increases and Simplifares impact together and saying they offset many of Delta's efforts at cutting $5B in cost savings is ludicrous at best. Since Delta has said that fuel cost increases are approaching $1B per year, that would mean by the statement in this article that Simplifares has caused a dilution of nearly $4B in revenue - an amount no one in their right mind is willing to believe.

If DL's DFW based rival is willing to go on record as saying Simplifares is having much less impact than they expected, that says alot more than any analyst who has very limited information on the actual finances at any airline.

Simplifares is a smart move by DL and is simply a copout that will be used by airlines that can't adapt to the new low-cost, value driven environment that is the US airline industry.
 

TheDog2004

Senior
Mar 26, 2004
267
0
The Simplifares model assumed $40 per barrell oil.

Obviously we don't have that right now.

The other problem Delta and other majors face is that NOBODY was paying the ridiculous walkup fare prices. In other words, all of these takes about how Simlifares hurt revenue are based on the false assumption that those who are buying Y fares at $499 each way would also be paying $1499 each way. That is simply not true.

But hey, it looks good in the newspaper and people don't know enough about the industry to not believe it.
 
OP
WorldTraveler

WorldTraveler

Corn Field
Dec 5, 2003
21,710
10,721
Simplifares is a revenue plan, not a cost plan. It has nothing to do with oil. Delta's transformation plan assumed $40 oil.

The whole point of the article above is that business travelers are recognizing that their travel costs have not necessarily gone down. Delta's point was not to dilute revenue but to create a pricing model that is perceived as fair. The LCCs all have rational pricing structures and are perceived as being a better value than the legacy airlines. Delta simply took a page out of the LCC book and created a value-driven pricing structure for its much more extensive network. We all know that WN gets higher average fares on many routes than do the legacy airlines with which it competes. If DL is able to do the same thing against LCCs or other legacies, that is a mark of brilliance, not stupidity.
 

TheDog2004

Senior
Mar 26, 2004
267
0
WorldTraveler said:
Simplifares is a revenue plan, not a cost plan. It has nothing to do with oil. Delta's transformation plan assumed $40 oil.

The whole point of the article above is that business travelers are recognizing that their travel costs have not necessarily gone down. Delta's point was not to dilute revenue but to create a pricing model that is perceived as fair. The LCCs all have rational pricing structures and are perceived as being a better value than the legacy airlines. Delta simply took a page out of the LCC book and created a value-driven pricing structure for its much more extensive network. We all know that WN gets higher average fares on many routes than do the legacy airlines with which it competes. If DL is able to do the same thing against LCCs or other legacies, that is a mark of brilliance, not stupidity.
[post="278776"][/post]​

WT, the two go hand in hand. You need to have revenue that gernerates a higher RASM than your CASM. Delta's simplifares were designed to generate a RASM that would be profitable when CASM assumed $40 per barrel oil. When oil approaches $60 per barrel that component of CASM is 50% higher than they thought, and now that Delta has marketed SimpliFares as 'no fare above $499' they are stuck. Even if they did raise the fares there is no guarantee that customers would pay more.

Delta will (and is starting to see) greater yields from SimpliFares, but as long as oil remains as high as it is then they won't be able to make money. In fact, higher oil is a threat to all airlines - inclcuding Southwest - because hedges eventually expire.

Your points are correct but Delta put together the pricing structure based on their projected CASM. They didn't just pull the $499 top fare out of a hat - it's the lowest top fare they felt they could offer that would sell and still allow them to make money.
 
OP
WorldTraveler

WorldTraveler

Corn Field
Dec 5, 2003
21,710
10,721
Simplifares was done to correct the revenue problem, not the cost problem. If SF was the right thing to do from a revenue standpoint, it doesn't really matter what the cost side of the house looked like. In reality costs had to come down and they will.

Where SF intersects with costs is in the company's ability to pay for the short-term dilution that it takes for DL to transition to a new fare environment. The essence of DL's transformation plan is a complete overhaul of the cost and revenue components of the company.

Yes, DL assumed lower oil prices but that doesn't mean SF wasn't the right thing to do. DL's CFO has also repeatedly said they are hitting their plan on the revenue side and non-fuel costs. Fuel is the issue. Given that only WN has sufficient long-term hedges to meaningfully maintain their cost advantage beyond this year, DL will soon be on the same footing as other airlines except for WN - which has largely stayed out of DL's key markets except for Florida. Even in Florida markets, DL has been willing to throw RJs up against WN with apparent success.

When DL's executives are bold enough to say that they are executing a plan that will put DL's costs within single digits of LCCs and have overhauled the revenue side of the company such that the incentive for LCCs to expand in DL's markets is greatly reduced, I feel very confident that DL is well on its way to recovery and being a long term player.
 

TheDog2004

Senior
Mar 26, 2004
267
0
WorldTraveler, I'm not disagreeing with you that SimpliFares wasn't the right thing to do. Where are you getting that? I have ALWAYS maintained it was the right thing to do.

The problem is it isn't generating the revenue needed to make money due to the price of oil at this time. That's my point. Delta - and no company for that matter - looks at cost and revenue in a vacuum. My point is that they had to set up the SimpliFares structure based on cost projections that have turned out to be incorrect due to factors beyond their control.

I have NEVER thought SimpliFares was anything other than the right thing to do. What I'm saying is that due to some extraordinary circumstances Delta is still not making money.
 
OP
WorldTraveler

WorldTraveler

Corn Field
Dec 5, 2003
21,710
10,721
So you would rather than DL have continued with a broken revenue model which ultimately didn't work until the other cost elements were fixed first? In the meantime, LCCs would be allowed to continue to grow and other aspects of the legacy business such as online ticketing could not move forward. Even assuming the $600M hit which some analysts said DL would take from Simplifares but which DL management said was way too high, fuel has more than surpassed whatever hit DL or any other legacy took from Simplifares. More importantly, however, the introduction of Simplifares was a down payment on a changed revenue model that couldn't be sustained anyway.
 

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